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Options Are Limited: Can the Defense Turn to Contract? CONSTRUCTION LAW Options Are Limited Can the Defense Turn By Bennett J. Hansen to Contract? and Alexander S. Wylie Oregon Supreme In Oregon’s ongoing construction defect wars, plaintiffs Court recognizes appear to have won the battle over the economic loss negligent construction doctrine. The tort of negligent construction is all but by declining to confirmed by the Oregon Supreme Court.Harris v. Suniga, 344 Or. 301, 180 P.3d 12 (2008). losses are those in which one participant in apply economic After the Oregon Supreme Court’s Harris the relationship agrees to act for the benefit decision, the main question is, can Oregon of the other, rather than at arm’s length. Id. loss doctrine. construction professionals limit their lia- at 161–62. Examples of special relationships bility through contract? include the attorney-client, agent-principal, and some insurer-insured relationships. Oregon’s Economic Loss While the economic loss doctrine has Doctrine Saga Closes been applied in Oregon for decades, it only Under Oregon’s long-standing version of the recently became significant to construction economic loss doctrine a plaintiff may not defect litigants. In July 2003, the Oregon recover in tort for purely economic losses Court of Appeals upheld a trial court dis- unless the plaintiff and defendant have a missal of tort claims in favor of a construc- special relationship. Economic losses are tion contractor in Jones v. Emerald Pacific broadly defined in Oregon as “financial Homes, Inc. Jones v. Emerald Pacific Homes, losses such as indebtedness incurred and Inc., 188 Or. App. 471, 71 P.3d 574 (2003). return of monies paid, as distinguished The Jones plaintiffs were homeowners from damages for injury to person or prop- who signed a custom-home construction erty.” Onita Pacific Corp., 315 Or. 149, 159, contract with their builder, Emerald Pacific 843 P.2d 890 (1992). Economic losses can Homes (Emerald). The homeowners then include lost profits, lost insurance proceeds, “became dissatisfied with Emerald’s alleged economic expectancy damages, investment failure to meet its schedule and with the al- losses, or money paid in settlement of per- legedly poor workmanship… in particular sonal injury claims. The kinds of relation- a leaky roof that caused damage to the in- ships that qualify for recovery of economic terior finish.”Id. at 473–74. The plaintiffs n Bennett J. Hansen is a partner with Preg, O’Donnell & Gillett. His litigation practice concentrates on defending clients involved in construction injury, contract disputes and defects claims, as well as automo- bile and trucking accidents. He has defended clients in trial and arbitration, and is a graduate of the National Institute of Trial Advocacy. Alexander S. Wylie is an attorney in Preg O’Donnell & Gillett’s Portland office. His practice focuses on civil litigation. © 2008 DRI. All rights reserved. For The Defense n August 2008 n 47 CONSTRUCTION LAW sued in contract and in tort, but the trial missed altogether based on the economic the contract, then, and even though the court and court of appeals found that be- loss doctrine, while many others likely relationship between the parties arises cause the homeowner-builder relationship accepted discounted settlements to avoid out of the contract, the injured party may was not special, the homeowners could not the risk of a similar fate. bring a claim for negligence if the other maintain a tort claim against Emerald. In 2006, the Oregon Court of Appeals party is subject to a standard of care in- Following Jones, contractors, insurers, accepted the opportunity to clear up the dependent of the terms of the contract. and defense counsel thought they might fi- dispute over the interpretation of Jones, and Georgetown Realty v. The Home Ins. Co., 313 nally have the case law support to win the the court did so in favor of the application Or. 97, 106, 831 P.2d 7 (1992). debate over whether the economic loss rule of tort in construction defect actions in the Oregon courts determine whether the case of Harris v. Suniga. Harris v. Suniga, parties are subject to a standard of care 209 Or. App. 410, 149 P.3d 224 (2006). In independent of the terms of the contract reversing the trial court’s tort claims dis- by examining the dynamics of the relation- In Harris the court of appeals missal under the economic loss doctrine, ship at issue. The Oregon Court of Appeals the court of appeals highlighted two prob- characterized this analysis as a two-step indicated that it was mere lems with applying Jones to Harris-like sit- process: uations. First, the court decided that Jones Thus, to bring a tort claim based on con- coincidence that Jones was not an economic loss doctrine case at duct that is also breach of a contract, a all. Second, it decided that construction plaintiff must allege, first, that the defen- involved construction defects. defect damages, such as dry rot, are not dant’s conduct violated some standard pure economic loss damages, but are, in of care that is not part of the defen- fact, “property” damage. dant’s explicit or implied contractual trumps tort claims in Oregon construc- As explained by the court of appeals, the obligations; and, second, that the inde- tion defect cases. But after Jones, two prob- issue in Jones was not economic loss dam- pendent standard of care stems from a lems arose, which were brought to the trial ages, but rather whether a breach of con- particular special relationship between court judge’s attention by plaintiffs’ lawyers. tract could give rise to a separate tort claim the parties. First, and notable for a seminal economic for identical injuries. The Harris plain- Strader v. Grange Mutual Ins. Co., 179 Or. loss case, the Jones court never mentioned tiffs did not have a contract with the de- App. 329, 333, 39 P.3d 903 (2002). the words “economic loss” in the opinion. fendant builders in their case; they were Construction defect cases in Oregon Second, plaintiffs’ counsel relied on an old remote purchasers. Moreover, the court of routinely involve issues of contract inter- Oregon Supreme Court case with some trou- appeals agreed with the plaintiffs that New- pretation. And because the special rela- blesome language, Newman v. Tualatin De- man’s facts were materially indistinguish- tionship analysis is relevant to evaluating velopment Co. Newman v. Tualatin Dev. Co., able from the facts in Harris, and therefore, dual tort/contract claims (as in Jones and 287 Or. 47, 597 P.2d 800 (1979). The New- Newman controlled. Strader), as well as the economic loss doc- man court relied on out-of-state cases in In Harris the court of appeals indicated trine, it is easy to see how the standards concluding that “we know of no reason” that it was mere coincidence that Jones could become intertwined. Moreover, the why the plaintiffs could not maintain a neg- involved construction defects. Instead, dual tort/contract claim rule lacks a dis- ligence claim for construction defects. according to the court, Jones represented tinguishing standard appellation like “eco- To counter these arguments, defense the application of a different long-standing nomic loss doctrine.” counsel pointed out that the Jones court rule of Oregon law, which, as with the eco- In March 2008, the Oregon Supreme relied on economic loss cases, and, as in nomic loss doctrine, also requires a spe- Court affirmed the court of appeals’ deci- those economic loss cases, the court had cial relationship, and the modern lineage sion in Harris, largely reiterating the lower focused on the lack of a special relationship of which is traced through Oregon’s eco- court’s analysis. Both courts began their between the parties. Therefore, the argu- nomic loss doctrine cases. See, e.g., Ore-Ida discussions with overarching statements ment went, Jones must have been an eco- Foods v. Indian Head, 290 Or. 909, 627 P.2d regarding Oregon’s negligence standard. nomic loss case. Moreover, it was argued 469 (1981); Conway v. Pacific University, 324 Since the 1987 Oregon Supreme Court case that Jones simply signaled that Oregon Or. 231, 924 P.2d 88 (1996). Fazzolari v. Portland School Dist. No. 1J, would follow its neighbor Washington The actual rule applied in Jones holds Oregon has favored a “foreseeability analy- State in outlawing “negligent construc- that, under Oregon law, parties to a con- sis” over a more traditional duty and breach tion” based on the economic loss doctrine. tract can maintain breach of contract and of duty analysis in negligence cases. Fazzo- Atherton Condominium Apartment- Owners tort claims for the same wrongful acts in lari v. Portland School Dist. No. 1J, 303 Or. Ass’n v. Blume Dev. Co., 115 Wash. 2d 506, limited circumstances: 1, 734 P.2d 1326 (1987). “We begin with the 799 P.2d 250 (1990). When the relationship involved is be- general rule that all persons are liable in For three and a half years, Oregon state tween contracting parties, and the gra- negligence if their conduct unreasonably and federal trial courts attempted to rec- vamen of the complaint is that one party creates a foreseeable risk of harm to oth- oncile Jones and Newman with variable caused damage to the other by negli- ers.” Harris v. Suniga, 209 Or. App. 410, 415, results. Some plaintiffs had their cases dis- gently performing its obligations under 149 P.3d 224 (2006). 48 n For The Defense n August 2008 While affirming the prominence of the ment. The terms of the limited warranty independent duty for parties to construc- foreseeability standard for negligence, the may amount to a blanket one-year labor and tion contracts is also probably incorrect.
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